Towards a constructive EU-India solution on the CBAM?

Earlier this month, The Financial Times reported that the EU was preparing to reject a demand from India to be exempted from its carbon border tax and suggested that the move would “complicate efforts to seal a trade deal between the two by the end of the year.”

Like many statements about the EU’s CBAM, made by the media and politicians, this is an oversimplification that misses key points and makes the CBAM sound like a zero-sum issue. Instead of zero-sum approaches, applying a little creativity could enable a genuinely helpful compromise.

There is no simple exemption possible from CBAM. But the current Indian proposal is shrewder: to levy its own carbon export levy, moving the point of revenue collection for CBAM-liable exports to the Indian border. While this is not a total solution, it can serve as a basis for negotiation.

India is absolutely right to propose that the ‘carbon adjustment mechanism’ can be applied at home. The EU is equally correct to say that there are key criteria it would need to fulfil in order to replace the European tariff.

At a minimum, to fulfil CBAM criteria under WTO equal treatment rules, the Indian export levy would need to be set at the same level that comparable goods pay at the European border. This means that the calculation of embedded emissions in exported goods would need to be transparent to EU carbon accounting inventories. The price point would also need to match, and although this will be quite low when the CBAM comes into full operation next year, it will rise significantly toward 2030.

Crucially, for a compromise to work, it must first be acknowledged that India’s CCTS carbon credit trading scheme is not (yet) equivalent to the EU ETS emissions trading system, which is the foundation for the CBAM. The ETS sets absolute carbon targets, and participants mostly purchase certificates at auction. The CCTS sets intensity targets, and the participants receive certificates through allocation.

This difference is why EU diplomats have responded that “there can be discussions around how any Indian effective carbon pricing could be deducted from CBAM” — but not gone any further. As Delhi is well aware, the European Commission is preparing technical rules under Article 9 of the CBAM Regulation on how to convert carbon prices paid on emissions in third countries into CBAM certification.

However, candid friends of both jurisdictions recognise that additional, broader issues would need to be addressed.

The EU would need to be confident that an Indian carbon export levy would not be rebated back to industry but genuinely drive decarbonisation. India would need to see Europe acknowledge that the CBAM is a cost pass-through imposed on trading partners, and that both its ambition and its complexity are likely to implicitly disadvantage certain producers, particularly smaller actors in lower-income countries.

This candid factor may be where creative solutions lie.

Could India commit to earmarking its domestically collected ‘CBAM’ revenue into a low-carbon transition fund for its emissions-intensive industries? Could the EU offer to contribute a useful additional sum of climate finance to this fund? Additionally, as a practical solution to enable transparency and reduce compliance burdens, could India assist Europe in building capacity for digital public infrastructure to verify and track emissions?

As a package, this approach might help address the current cost premium on green industry capital investments and operating costs, as well as wider issues of climate justice, interoperability between domestic policies in global markets, and co-governance.

Operationalising this sort of ‘levy fund’ would require goodwill on both sides. The fund could be initially established for a limited period until 2030 and then reviewed by both parties. By responding to Delhi’s proposal with a positive and constructive idea, Brussels would affirm the stated goal of the CBAM to “play a leading role in global climate action” and start to deliver on its New Strategic EU-India Agenda vision, adopted in September.

Let’s remember that there is more at stake here than just the CBAM, which is only a subfield within the wider field of climate diplomacy and the scope of EU-India cooperative opportunities. I don’t believe the Financial Times is correct to imply that the current free trade agreement could be derailed by such a relatively minor issue. Instead, the EU and India could address solutions to the CBAM, for example, through an MOU on a green economy partnership as part of the strategic agenda that will be discussed at next year’s EU-India Leaders’ Summit.

The CBAM is a squaring-the-circle problem. As I’ve argued elsewhere, CBAM is the ‘right answer’ to the climate imperative, but doing the right thing is not sufficient to get a good result. There is an obvious ‘right-sizing’ challenge when EU standards affect developing economies, where policies designed in Brussels encounter a world of diverse circumstances, resources, and capabilities.

To get us past the frictions of CBAM, a little more give-and-take will be needed on both sides.

This article is also published on Sustainable Views. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.

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